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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549


FORM 10-Q

 
(Mark One)
x
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended April 2, 2011
 
OR
 
o
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from              to              
 
Commission file number: 001-32320
 

BUILD-A-BEAR WORKSHOP, INC.
(Exact Name of Registrant as Specified in Its Charter)

 
Delaware
43-1883836
(State or Other Jurisdiction of
Incorporation or Organization)
(IRS Employer
Identification No.)
 
   
1954 Innerbelt Business Center Drive
St. Louis, Missouri
63114
(Address of Principal Executive Offices)
(Zip Code)
 
(314) 423-8000
(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No   ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No   ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer ¨
Accelerated filer x
   
Non-accelerated filer ¨  
Smaller reporting company ¨
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ¨    No  x
 
As of May 9, 2011, there were 19,588,378 issued and outstanding shares of the registrant’s common stock.
 


 
 

 
 
BUILD-A-BEAR WORKSHOP, INC.
INDEX TO FORM 10-Q
 
       
     
Page
   
Part I Financial Information
 
       
 
Item 1.
Financial Statements (Unaudited)
     3
   
Consolidated Balance Sheets
     3
   
Consolidated Statements of Operations
     4
   
Consolidated Statements of Cash Flows
     5
   
Notes to Consolidated Financial Statements
     6
       
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
     11
       
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
     19
       
 
Item 4.
Controls and Procedures
     19
   
Part II Other Information
 
       
 
Item  1A.
Risk Factors
     20
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
     20
 
Item 6.
Exhibits
     21
     
 
Signatures
22
 
 
2

 
 
PART I-FINANCIAL INFORMATION
 
Item 1. Financial Statements
BUILD-A-BEAR WORKSHOP, INC. AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED BALANCE SHEETS
 
(Unaudited)
 
(Dollars in thousands, except share and per share data)
 
             
   
April 2,
   
January 1,
 
   
2011
   
2011
 
             
ASSETS
 Current assets:
           
 Cash and cash equivalents
  $ 45,124     $ 58,755  
 Inventories
    39,492       46,475  
 Receivables
    3,503       7,923  
 Prepaid expenses and other current assets
    19,128       18,425  
 Deferred tax assets
    7,539       7,465  
 Total current assets
    114,786       139,043  
                 
 Property and equipment, net of accumulated depreciation of $168,978 and $163,606, respectively
    83,461       88,029  
 Goodwill
    33,561       32,407  
 Other intangible assets, net
    1,264       1,444  
 Other assets, net
    14,462       14,871  
 Total Assets
  $ 247,534     $ 275,794  
                 
 LIABILITIES AND STOCKHOLDERS' EQUITY
 Current liabilities:
               
 Accounts payable
  $ 25,103     $ 36,325  
 Accrued expenses
    6,363       15,488  
 Gift cards and customer deposits
    24,291       28,880  
 Deferred revenue
    6,761       6,679  
 Total current liabilities
    62,518       87,372  
                 
 Deferred franchise revenue
    1,639       1,706  
 Deferred rent
    27,387       28,642  
 Other liabilities
    344       361  
                 
 Stockholders' equity:
               
 Preferred stock, par value $0.01, Shares authorized: 15,000,000; No shares
               
 issued or outstanding at April 2, 2011 and January 1, 2011
    -       -  
 Common stock, par value $0.01, Shares authorized: 50,000,000;
               
 Issued and outstanding: 19,600,470 and 19,631,623 shares, respectively
    196       196  
 Additional paid-in capital
    74,409       76,582  
 Accumulated other comprehensive loss
    (7,602 )     (9,959 )
 Retained earnings
    88,643       90,894  
 Total stockholders' equity
    155,646       157,713  
 Total Liabilities and Stockholders' Equity
  $ 247,534     $ 275,794  
 
See accompanying notes to condensed consolidated financial statements.
 
 
3

 

BUILD-A-BEAR WORKSHOP, INC. AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
(Unaudited)
 
(Dollars in thousands, except share and per share data)
 
             
   
Thirteen weeks ended
 
   
April 2, 2011
   
April 3, 2010
 
             
Revenues:
           
Net retail sales
  $ 94,159     $ 99,786  
Commercial revenue
    1,106       967  
Franchise fees
    726       683  
Total revenues
    95,991       101,436  
                 
Costs and expenses:
               
Cost of merchandise sold
    58,225       59,106  
Selling, general and administrative
    41,265       39,533  
Store preopening
    47       11  
Interest expense (income), net
    103       (32 )
Total costs and expenses
    99,640       98,618  
                 
Income (loss) before income taxes
    (3,649 )     2,818  
Income tax expense (benefit)
    (1,398 )     1,139  
Net income (loss)
  $ (2,251 )   $ 1,679  
                 
Earnings (loss) per common share:
               
Basic
  $ (0.12 )   $ 0.09  
Diluted
  $ (0.12 )   $ 0.09  
                 
Shares used in computing common per share amounts:
         
Basic
    18,090,245       18,974,540  
Diluted
    18,090,245       19,392,479  
 
See accompanying notes to condensed consolidated financial statements.
 
 
4

 
 
BUILD-A-BEAR WORKSHOP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
             
   
Thirteen weeks ended
 
   
April 2, 2011
   
April 3, 2010
 
             
Cash flows from operating activities:
           
Net income (loss)
  $ (2,251 )   $ 1,679  
Adjustments to reconcile net income to
               
net cash used in operating activities:
               
Depreciation and amortization
    6,524       6,868  
Deferred taxes
    392       112  
Loss on disposal of property and equipment
    119       28  
Stock-based compensation
    1,255       1,229  
Change in assets and liabilities:
               
Inventories
    7,220       (2,998 )
Receivables
    4,465       1,246  
Prepaid expenses and other assets
    (873 )     1,504  
Accounts payable and accrued expenses
    (20,433 )     (5,028 )
Lease related liabilities
    (1,330 )     (1,075 )
Gift cards and customer deposits and deferred revenue
    (4,644 )     (4,548 )
Net cash used in operating activities
    (9,556 )     (983 )
Cash flows from investing activities:
               
Purchases of property and equipment, net
    (2,229 )     (2,916 )
Purchases of other assets and other intangible assets
    (93 )     (341 )
Net cash used in investing activities
    (2,322 )     (3,257 )
Cash flows from financing activities:
               
Purchases of Company's common stock
    (2,464 )     (1,359 )
Exercise of employee stock options
    3       -  
Net cash used in financing activities
    (2,461 )     (1,359 )
Effect of exchange rates on cash
    708       (1,560 )
Net decrease in cash and cash equivalents
    (13,631 )     (7,159 )
Cash and cash equivalents, beginning of period
    58,755       60,399  
Cash and cash equivalents, end of period
  $ 45,124     $ 53,240  
Supplemental disclosure of cash flow information:
               
Net cash (received) paid during the period for income taxes
  $ (867 )   $ 14  
Noncash Transactions:
               
Return of common stock in lieu of tax withholdings and option exercises
  $ 671     $ 654  
 
See accompanying notes to condensed consolidated financial statements.
 
 
5

 
 
Notes to Consolidated Financial Statements
 
1. Basis of Presentation
 
The condensed consolidated financial statements included herein are unaudited and have been prepared by Build-A-Bear Workshop, Inc. and its subsidiaries (collectively, the “Company”) pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to such rules and regulations. The condensed consolidated balance sheet of the Company as of January 1, 2011 was derived from the Company’s audited consolidated balance sheet as of that date. All other condensed consolidated financial statements contained herein are unaudited and reflect all adjustments which are, in the opinion of management, necessary to summarize fairly the financial position of the Company and the results of the Company’s operations and cash flows for the periods presented. All of these adjustments are of a normal recurring nature. All significant intercompany balances and transactions have been eliminated in consolidation. Because of the seasonal nature of the Company’s operations, results of operations of any single reporting period should not be considered as indicative of results for a full year. These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the fiscal year ended January 1, 2011, which were included in the Company’s annual report on Form 10-K filed with the SEC on March 17, 2011.
 
Certain reclassifications of prior year amounts have been made to conform to the current year presentation.
 
2. Prepaid Expenses and Other Assets
 
Prepaid expenses and other current assets consist of the following (in thousands):
 
   
April 2,
   
January 1,
 
   
2011
   
2011
 
Prepaid rent
  $ 7,914     $ 7,959  
Prepaid income taxes
    2,908       2,458  
Short-term investments
    2,834       1,771  
Other
    5,472       6,237  
    $ 19,128     $ 18,425  
 
3. Goodwill
 
Goodwill is accounted for in accordance with Financial Accounting Standards Board Accounting Standards Codification (ASC) Section 350-20 and is reported as a component of the Company’s retail segment. The following table summarizes the changes in goodwill for the thirteen weeks ended April 2, 2011 (in thousands):
 
Balance as of January 1, 2011
  $ 32,407  
   Effect of foreign currency translation
    1,154  
Balance as of April 2, 2011
  $ 33,561  
 
Goodwill is not subject to amortization and is tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. This testing requires comparison of carrying values to fair values, and when appropriate, the carrying value of impaired assets is reduced to fair value. Goodwill will be tested for impairment no later than December 31, 2011.
 
4. Stock-based Compensation
 
The Company accounts for stock-based compensation in accordance with ASC Section 718. The Company uses the straight-line expense attribution method for all stock-based compensation awards with graded vesting.
 
For the thirteen weeks ended April 2, 2011, selling, general and administrative expense includes $1.3 million ($0.8 million after tax) of stock-based compensation expense.  For the thirteen weeks ended April 3, 2010, selling, general and administrative expenses includes $1.2 million ($0.7 million after tax) of stock-based compensation expense.
 
As of April 2, 2011, there was $9.4 million of total unrecognized compensation expense related to nonvested restricted stock and option awards which is expected to be recognized over a weighted-average period of 1.6 years.
 
 
6

 
 
5. Stock Incentive Plans
 
On April 3, 2000, the Company adopted the 2000 Stock Option Plan (the Plan). In 2003, the Company adopted the Build-A-Bear Workshop, Inc. 2002 Stock Incentive Plan; in 2004, the Company adopted the Build-A-Bear Workshop, Inc. 2004 Stock Incentive Plan, and in 2009, the Company amended and restated the Build-A-Bear Workshop, Inc. 2004 Stock Incentive Plan (collectively, the Plans).
 
Under the Plans, as amended, from January 3, 2009, up to 3,230,000 shares of common stock were reserved and may be granted to employees and nonemployees of the Company. The Plan allows for the grant of incentive stock options, nonqualified stock options, stock appreciation rights (SAR) and restricted stock. Options granted under the Plan expire no later than 10 years from the date of the grant. The exercise price of each incentive stock option shall not be less than 100% of the fair value of the stock subject to the option on the date the option is granted. The exercise price of all options shall be the fair market value on the date of the grant. The vesting provision of individual options is at the discretion of the compensation committee of the board of directors and generally ranges from one to four years. Each share of stock awarded pursuant to an option or subject to the exercised portion of a SAR reduces the number of shares available by one share. Each share of stock awarded pursuant to any other stock-based awards, including restricted stock grants, reduces the number of shares available by 1.27 shares.
 
(a) Stock Options
 
The following table is a summary of the balances and activity for the Plans related to stock options for the thirteen weeks ended April 2, 2011:
 
               
Weighted
   
Aggregate
 
         
Weighted
   
Average
   
Intrinsic
 
   
Number of
   
Average
   
Remaining
   
Value
 
   
Shares
   
Exercise Price
   
Contractual Term
   
(in thousands)
 
Outstanding, January 1, 2011
    1,125,223     $ 8.73              
Granted
    301,403       6.22              
Exercised
    11,621       5.99              
Forfeited
    2,111       8.58              
Outstanding, April 2, 2011
    1,412,894     $ 8.22       7.5     $ 468  
                                 
Options Exercisable As Of:
                               
April 2, 2011
    608,279     $ 11.10       5.5     $ 235  
 
The Company generally issues new shares to satisfy option exercises.
 
The expense recorded related to options granted during the thirteen weeks ended April 2, 2011 was determined using the Black-Scholes option pricing model and the provisions of Staff Accounting Bulletin (SAB) 107 and 110, which allow the use of a simplified method to estimate the expected term of “plain vanilla” options. The assumptions used in the option pricing model for the thirteen weeks ended April 2, 2011 were: (a) dividend yield of 0%; (b) volatility of 65%; (c) risk-free interest rates ranging from 2.4% to 2.5%; and (d) an expected life of 6.25 years.
 
The expense recorded related to options granted during the thirteen weeks ended April 3, 2010 was determined using the Black-Scholes option pricing model and the provisions of SAB 107 and 110, which allow the use of a simplified method to estimate the expected term of “plain vanilla” options. The assumptions used in the option pricing model for the thirteen weeks ended April 3, 2010 were: (a) dividend yield of 0%; (b) volatility of 65%; (c) risk-free interest rates of 3.0%; and (d) an expected life of 6.25 years.
 
 
7

 
 
(b) Restricted Stock
 
The following table is a summary of the balances and activity for the Plans related to restricted stock granted as compensation to employees and directors for the thirteen weeks ended April 2, 2011:
 
         
Weighted
 
         
Average Grant
 
   
Number of
   
Date Fair Value
 
   
Shares
   
per Award
 
Outstanding, January 1, 2011
    1,468,378     $ 5.96  
Granted
    452,972       6.21  
Vested
    305,994       8.97  
Canceled or expired
    5,439       6.22  
Outstanding, April 2, 2011
    1,609,917     $ 5.46  
 
The total fair value of shares vested during the thirteen weeks ended April 2, 2011 and April 3, 2010 was $1.9 million and $1.7 million, respectively.
 
6. Earnings per Share
 
The following table sets forth the computation of basic and diluted earnings per share (in thousands, except share and per share data):
 
   
Thirteen weeks ended
 
   
April 2, 2011
   
April 3, 2010
 
             
Net income (loss)
  $ (2,251 )   $ 1,679  
Weighted average number of common
               
shares outstanding
    18,090,245       18,974,540  
Effect of dilutive securities:
               
Stock options
    -       100,995  
Restricted stock
    -       316,944  
Weighted average number of common
               
shares outstanding - dilutive
    18,090,245       19,392,479  
                 
Earnings (loss) per share:
               
Basic:
  $ (0.12 )   $ 0.09  
Diluted
  $ (0.12 )   $ 0.09  
 
In calculating diluted earnings per share for the thirteen weeks ended April 2, 2011, options to purchase 1,412,894 shares of common stock were outstanding as of the end of the period, but were not included in the computation of diluted earnings per share due to their anti-dilutive effect under the provisions of ASC 260-10.  An additional 1,609,917 shares of restricted common stock were outstanding at the end of the period, but excluded from the calculation of diluted earnings per share due to their anti-dilutive effect.
 
In calculating diluted earnings per share for the thirteen weeks ended April 3, 2010, options to purchase 1,123,641 shares of common stock were outstanding as of the end of the period, but were not included in the computation of diluted earnings per share due to their anti-dilutive effect.  An additional 592,492 shares of restricted common stock were outstanding at the end of the period, but excluded from the calculation of diluted earnings per share due to their anti-dilutive effect.
 
7. Comprehensive Income or Loss
 
Comprehensive income was $0.1 million for the thirteen weeks ended April 2, 2011.  Comprehensive loss was $2.7 million for the thirteen weeks ended April 3, 2010. The difference between comprehensive income and net income resulted from foreign currency translation adjustments on the balance sheets of subsidiaries whose functional currency is not the US Dollar.
 
 
8

 
 
8. Income Taxes
 
The Company accounts for uncertainty in income taxes in accordance with ASC Section 740-10.  As of April 2, 2011  and January 1, 2011, there were approximately $0.3 million of unrecognized tax benefits. During the next twelve months, it is reasonably possible to reduce unrecognized tax benefits by $0.1 million either because the tax positions are sustained on audit or expiration of the statute of limitations.  Interest and penalties related to uncertain tax positions are immaterial.
 
 9. Segment Information
 
The Company’s operations are conducted through three operating segments consisting of retail, international franchising and commercial.  The retail segment includes the operating activities of company-owned stores in the United States, Canada, the United Kingdom, Ireland, France and other retail delivery operations, including the Company’s web store, pop-up stores and non-traditional store locations such as baseball ballparks.  The commercial segment includes the Company’s transactions with other businesses, mainly comprised of licensing the Company’s intellectual property, including entertainment properties, for third-party use has been established to market the naming and branding rights of the Company’s intellectual properties for third party use and wholesale activities.  The international franchising segment includes the licensing activities of the Company’s franchise agreements with store locations in Europe, outside of France, Asia, Australia, the Middle East, Mexico and Africa.  The operating segments have discrete sources of revenue, different capital structures and different cost structures.  These operating segments represent the basis on which the Company’s chief operating decision maker regularly evaluates the business in assessing performance, determining the allocation of resources and the pursuit of future growth opportunities.  Accordingly, the Company has determined that each of its operating segments represent one reportable segment.  The reportable segments follow the same accounting policies used for the Company’s consolidated financial statements.
 
Following is a summary of the financial information for the Company’s reportable segments (in thousands):
 
               
International
       
   
Retail
   
Commercial
   
Franchising
   
Total
 
Thirteen weeks ended April 2, 2011
                       
Net sales to external customers
  $ 94,159     $ 1,106     $ 726     $ 95,991  
Income (loss) before income taxes
    (4,384 )     410       325       (3,649 )
Capital expenditures, net
    2,288       -       34       2,322  
Depreciation and amortization
    6,468       -       56       6,524  
Thirteen weeks ended April 3, 2010
                               
Net sales to external customers
  $ 99,786     $ 967     $ 683     $ 101,436  
Income before income taxes
    1,909       570       339       2,818  
Capital expenditures, net
    3,221       -       36       3,257  
Depreciation and amortization
    6,765       -       103       6,868  
                                 
                                 
Total Assets as of:
                               
April 2, 2011
  $ 234,636     $ 10,153     $ 2,745     $ 247,534  
April 3, 2010
    261,903       3,332       3,436       268,671  
 
 
9

 
 
The Company’s reportable segments are primarily determined by the types of products and services that they offer. Each reportable segment may operate in many geographic areas. The Company allocates revenues to geographic areas based on the location of the customer or franchisee. The following schedule is a summary of the Company’s sales to external customers and long-lived assets by geographic area (in thousands):
 
   
North
                   
   
America (1)
   
Europe (2)
   
Other (3)
   
Total
 
Thirteen weeks ended April 2, 2011
                       
Net sales to external customers
  $ 79,183     $ 16,082     $ 726     $ 95,991  
Property and equipment, net
    72,241       11,220       -       83,461  
Thirteen weeks ended April 3, 2010
                               
Net sales to external customers
  $ 84,968     $ 15,785     $ 683     $ 101,436  
Property and equipment, net
    84,083       11,858       -       95,941  
                                 
(1) North America includes company-owned stores in the United States, Canada and Puerto Rico
         
(2) Europe includes company-owned stores in the United Kingdom and Ireland and, prior to 2011, France
 
(3) Other includes franchise businesses outside of the United States, Canada, Puerto Rico, the United Kingdom, Ireland and France
 

 
10

 
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from the results discussed in the forward-looking statements. These risks and uncertainties include, without limitation, those detailed under the caption “Risk Factors” in our annual report on Form 10-K for the year ended January 1, 2011, as filed with the SEC, and the following: general economic conditions may continue to deteriorate, which could lead to disproportionately reduced consumer demand for our products, which represent relatively discretionary spending; customer traffic may continue to decrease in the shopping malls where we are located, on which we depend to attract guests to our stores; we may be unable to generate interest in and demand for our interactive retail experience, or to identify and respond to consumer preferences in a timely fashion; our marketing and on-line initiatives may not be effective in generating sufficient levels of brand awareness and guest traffic; we may be unable to generate comparable store sales growth; we may be unable to renew or replace our store leases, or enter into leases for new stores on favorable terms or in favorable locations, or may violate the terms of our current leases; we may be unable to effectively manage the operations and growth of our company-owned stores; the availability and costs of our products could be adversely affected by risks associated with international manufacturing and trade, including foreign currency fluctuation; we are susceptible to disruption in our inventory flow due to our reliance on a few vendors; high petroleum products prices could increase our inventory transportation costs and adversely affect our profitability; we may be unable to effectively manage our international franchises or laws relating to those franchises may change; we may be unable to operate our European company-owned stores profitably; fluctuations in our quarterly results of operations could cause the price of our common stock to substantially decline; we may be unable to repurchase shares at all or at the times or in the amounts we currently anticipate or the results of the share repurchase program may not be as beneficial as we currently anticipate; our products could become subject to recalls or product liability claims that could adversely impact our financial performance and harm our reputation among consumers; we may improperly obtain or be unable to protect information from our guests in violation of privacy or security laws or expectations; we may suffer negative publicity or be sued due to violations of labor laws or unethical practices by manufacturers of our merchandise; we may suffer negative publicity or negative sales if the non-proprietary toy products we sell in our stores do not meet our quality or sales expectations; we may lose key personnel, be unable to hire qualified additional personnel, or experience turnover of our management team; we may be unable operate our company-owned distribution center efficiently or our third-party distribution center providers may perform poorly; our market share could be adversely affected by a significant, or increased, number of competitors; we may fail to renew, register or otherwise protect our trademarks or other intellectual property; we may have disputes with, or be sued by, third parties for infringement or misappropriation of their proprietary rights; and poor global economic conditions could have a material adverse effect on our liquidity and capital resources. These risks, uncertainties and other factors may adversely affect our business, growth, financial condition or profitability, or subject us to potential liability, and cause our actual results, performance or achievements to be materially different from those expressed or implied by our forward-looking statements.  The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
 
Overview
 
We are the leading, and only international, company providing a “make your own stuffed animal” interactive entertainment experience under the Build-A-Bear Workshop brand, in which our guests stuff, fluff, dress, accessorize and name their own teddy bears and other stuffed animals.  Our concept, which we developed primarily for mall-based retailing, capitalizes on what we believe is the relatively untapped demand for experience-based shopping as well as the widespread appeal of stuffed animals.  The Build-A-Bear Workshop experience appeals to a broad range of age groups and demographics, including children, teens, their parents and grandparents.
 
As of April 2, 2011, we operated 288 stores in the United States, Canada, and Puerto Rico, 54 stores in the United Kingdom and Ireland, and had 63 franchised stores operating internationally under the Build-A-Bear Workshop brand.  We also market our products and build our brand through our website, which simulates our interactive shopping experience, as well as 11 temporary pop-up locations and non-traditional store locations in three Major League Baseball® parks, one zoo and one science center.  Seasonal locations, such as ballparks and zoos, are excluded from our store count.
 
On April 2, 2006, we acquired all of the outstanding shares of The Bear Factory Limited, a stuffed animal retailer in the United Kingdom, and Amsbra Limited, our former U.K. franchisee.  The results of the acquisitions’ operations have been included in the consolidated financial statements since that date.  We are currently operating 35 of the acquired stores.  Since 2006, our European operations have grown to 54 stores.  We have adopted internal best practices in the areas of merchandising, marketing, purchasing and store operations, across the acquired store base that resulted in improved sales and earnings from the acquisition.
 
 
11

 
 
We operate in three reportable segments (retail, commercial and international franchising) that share the same infrastructure, including management, systems, merchandising and marketing, and generate revenues as follows:
 
 
Company-owned retail stores located in the United States, Canada, Puerto Rico, the United Kingdom and Ireland, webstores, pop-ups and seasonal, event-based locations;
 
 
Transactions with other business partners, mainly comprised of licensing our intellectual property, including entertainment properties, for third-party use and wholesale product sales; and
 
 
 •
International stores operated under franchise agreements.
 
Selected financial data attributable to each segment for the thirteen weeks ended April 2, 2011 and April 3, 2010 are set forth in the notes to our condensed consolidated financial statements included elsewhere in this quarterly report on Form 10-Q.
 
Store contribution, for our consolidated operations, was 14.4% for the thirteen weeks ended April 2, 2011 and 17.2% for the thirteen weeks ended April 3, 2010.  Consolidated net loss as a percentage of total revenues was 2.3% for the thirteen weeks ended April 2, 2011 and consolidated net income as a percentage of total revenues was 1.7% for the thirteen weeks ended April 3, 2010.  See “— Non-GAAP Financial Measures” for a definition of store contribution and a reconciliation of store contribution to net income or loss.  The decrease in our store contribution over the prior year was primarily due to the decrease in comparable store sales and the corresponding decrease in gross margins as we lost leverage on our fixed occupancy costs.
 
We use comparable store sales as one of the performance measures for our business.  Comparable store sales percentage changes are based on net retail sales, excluding our webstores, pop-up and seasonal and event-based locations.  Stores are considered comparable beginning in their thirteenth full month of operation.  The percentage change in comparable store sales for the periods presented below is as follows:
 
   
Thirteen Weeks Ended
   
April 2, 2011
 
April 3, 2010
             
North America
  (9.3 )%   1.9 %
Europe
  (4.1 )%   3.2 %
Consolidated
  (8.5 )%   2.1 %
 
We believe the decrease in comparable store sales for the period presented is primarily attributable to the following factors:
 
 
We believe the calendar shift of the Easter holiday and associated school breaks to the fiscal 2011 second quarter from the fiscal 2010 first quarter negatively impacted our comparable store sales.
 
 
We believe that the decline in gift card sales in the 2010 fourth quarter negatively impacted our comparable store sales in the fiscal 2011 first quarter as a significant percentage of the cards are redeemed in the first quarter.
 
 
We believe that in the UK, the increase in VAT coupled with cutbacks in government spending has resulted in a decline in consumer sentiment and a corresponding decline in spending, negatively impacting our comparable store sales.  We believe that this decline was partially offset by the impact of weather which made the year-over-year comparison easier and created pent-up demand during December of 2010.
 
The Company is working to reverse this negative trend in comparable store sales with the following key initiatives:
 
 
We are continuing our focus on product innovation and introducing limited edition products supported by a fully integrated approach to marketing and promotion;
 
 
We intend to drive incremental sales from existing traffic by expanding our assortment of brand right toys;
 
 
We are focused on increasing engagement in the digital world, both through our online virtual world for children, bearville.com, and our social media efforts, to drive brand interaction and traffic to our stores; and
 
 
We enhanced our gift card upsell program to drive incremental visits to our stores.
 
12

 
 
Expansion and Growth Potential
 
Retail Stores
 
 
The table below sets forth the number of Build-A-Bear Workshop company-owned stores in the United States, Canada, the United Kingdom, Ireland, and France for the periods presented:
 
   
Thirteen Weeks Ended
 
   
April 2, 2011
   
April 3, 2010
 
Beginning of period
  344     345  
Opened
  -     -  
Closed
  (2 )   -  
End of period
  342     345  
 
During fiscal 2011, we anticipate opening approximately six stores and closing five to ten stores.  We believe there is a market potential for at least 350 Build-A-Bear Workshop stores in the United States and Canada and approximately 70 stores in the United Kingdom and Ireland.
 
Non-Traditional Store Locations
 
In fiscal 2004, we began offering merchandise in seasonal, event-based locations such as Major League Baseball® ballparks. We expect to expand our future presence at select seasonal, event-based locations contingent on their availability and the financial terms associated with the venue.  As of April 2, 2011, we had a total of three ballpark locations, one store within a zoo and one store within a science center. Seasonal locations, such as ballparks and zoos are excluded from our store count. In 2010, we opened our first pop-up stores.  Pop-up stores are temporary locations that generally have lease terms of six to eighteen months and are excluded from our store count.  These locations are intended to capitalize on short-term opportunities in specific locations.  As of April 2, 2011, 11 pop-up stores were open.
 
International Franchise Revenue
 
Our first franchised location opened in November 2003. The number of international, franchised stores for the periods presented below can be summarized as follows:
   
Thirteen Weeks Ended
 
   
April 2, 2011
   
April 3, 2010
 
Beginning of period
  63     65  
Opened
  2     2  
Closed
  (2 )   (4 )
End of period
  63     63  
 
 
As of April 2, 2011, we had master franchise agreements, which typically grant franchise rights for a particular country or countries, covering an aggregate of 16 countries.  In the ordinary course of business, we anticipate signing additional master franchise agreements in the future and terminating other such agreements.  We expect our current and future franchisees to open five to ten stores in fiscal 2011, net of closures.  We believe there is a market potential for approximately 300 franchised stores outside of the United States, Canada, Puerto Rico, the United Kingdom and Ireland.
 
 
13

 
 
Results of Operations
 
The following table sets forth, for the periods indicated, selected statement of operation data expressed as a percentage of total revenues, except where otherwise indicated.  Percentages will not total due to cost of merchandise sold being expressed as a percentage of net retail sales and commercial revenue and immaterial rounding:
 
   
Thirteen weeks ended
   
April 2,
 
April 3,
   
2011
 
2010
Revenues:
           
Net retail sales
  98.1 %   98.4 %
Commercial revenue
  1.2     1.0  
Franchise fees
  0.8     0.7  
Total revenues
  100.0     100.0  
             
Costs and expenses:
           
Cost of merchandise sold (1)
  61.1     58.7  
Selling, general and administrative
  43.0     39.0  
Store preopening
  0.0     0.0  
Interest expense (income), net
  0.1     (0.0 )
Total costs and expenses
  103.8     97.2  
             
Income (loss) before income taxes
  (3.8 )   2.8  
Income tax expense (benefit)
  (1.5 )   1.1  
Net income (loss)
  (2.3 )   1.7  
             
             
Retail gross margin % (2)
  38.8 %   41.1 %


(1)
Cost of merchandise sold is expressed as a percentage of net retail sales and commercial revenue.

(2)
Retail gross margin represents net retail sales less cost of retail merchandise sold, which excludes cost of wholesale merchandise sold.  Retail gross margin was $36.6 million and $41.0 million for the thirteen weeks ended April 2, 2011 and April 3, 2010, respectively.  Retail gross margin percentage represents retail gross margin divided by net retail sales.
 
 
Thirteen weeks ended April 2, 2011 compared to thirteen weeks ended April 3, 2010
 
Total revenues. Total revenues were $96.0 million for the thirteen weeks ended April 2, 2011 as compared to $101.4 million for the thirteen weeks ended April 3, 2010, a decrease of $5.4 million, or 5.4%.  Net retail sales were to $94.2 million for the thirteen weeks ended April 2, 2011 as compared to $99.8 million for the thirteen weeks ended April 3, 2010, a decrease of $5.6 million, or 5.6%.  The decrease in net retail sales was primarily attributable to an $8.0 million decrease in comparable store sales and a $1.2 million decrease in sales from non-comparable store locations, primarily closures and relocations, offset by a $1.6 million increase in sales from pop-up and other non-store locations, $0.9 million from new stores, $0.7 million positive impact of foreign currency translation and a $0.4 million changes in deferred revenue.
 
We believe the decrease in comparable store sales for the periods presented is primarily attributable to the following factors:
 
 
We believe the calendar shift of the Easter holiday and associated school breaks to the fiscal 2011 second quarter from the fiscal 2010 first quarter negatively impacted our comparable store sales.
 
 
We believe that the decline in gift card sales in the 2010 fourth quarter negatively impacted our comparable store sales in the fiscal 2011 first quarter as a significant percentage of the cards are redeemed in the first quarter.
 
 
We believe that in the UK, the increase in VAT coupled with cutbacks in government spending has resulted in a decline in consumer sentiment and a corresponding decline in spending, negatively impacting our comparable store sales. We believe that this decline was partially offset by the impact of weather which made the year-over-year comparison easier and created pent-up demand during December of 2010.
 
 
14

 
 
Commercial revenue increased to $1.1 million for the thirteen weeks ended April 2, 2011 from $1.0 million for the thirteen weeks ended April 3, 2010, an increase of $0.1 million.  This increase was primarily related to increased wholesale revenue offset by decreased licensing revenue at the anniversary of new Wii and Nintendo DS games in the 2010 first quarter.  Revenue from franchise fees was $0.7 million for the thirteen weeks ended April 2, 2011 and April 3, 2010.
 
Gross margin. Total gross margin was $37.0 million for the thirteen weeks ended April 2, 2011 as compared to $41.6 million for the thirteen weeks ended April 3, 2010, a decrease of $4.6 million, or 11.1%.  Retail gross margin decreased to $36.6 million for the thirteen weeks ended April 2, 2011 from $41.0 million for the thirteen weeks ended April 3, 2010, a decrease of $4.4 million, or 10.7%.  As a percentage of net retail sales, retail gross margin was 38.8% for the thirteen weeks ended April 2, 2011 as compared to 41.1% for the thirteen weeks ended April 3, 2010, a decrease of 230 basis points as a percentage of net retail sales (bps).  Our gross margin decline was primarily driven by 140 bps of deleverage of fixed occupancy costs.  A slight decline in merchandise margin and increased costs of supplies and distribution had a 90 bps impact.
 
Selling, general and administrative. Selling, general and administrative expenses were $41.3 million for the thirteen weeks ended April 2, 2011 as compared to $39.5 million for the thirteen weeks ended April 3, 2010, an increase of $1.7 million, or 4.4%.  As a percentage of total revenues, selling, general and administrative expenses were 43.0% for the thirteen weeks ended April 2, 2011 as compared to 39.0% for the thirteen weeks ended April 3, 2010, an increase of 400 bps.  The dollar increase was primarily attributable to costs of a consulting project to evaluate product supply chain costs and the write-off of one wholesale customer’s receivable, partially offset by decreases in store payroll and advertising.  The increase as a percent of revenue was primarily due to the increased costs and deleverage due to decreased revenue.
 
Interest expense (income), net. Interest expense, net of interest income, was $103,000 for the thirteen weeks ended April 2, 2011.  Interest income, net of interest expense, was $32,000 for the thirteen weeks ended April 3, 2010.  The increase in interest expense was primarily attributable to interest relating to an ongoing sales and use tax audit.
 
Provision for income taxes. The income tax benefit was $1.4 million for the thirteen weeks ended April 2, 2011 as compared to income tax expense of $1.1 million for the thirteen weeks ended April 3, 2010.  The effective tax rate was 38.3% for the thirteen weeks ended April 2, 2011 compared to 40.4% for the thirteen weeks ended April 3, 2010.  The decrease in the effective tax rate was primarily attributable to the impact of recording a valuation allowance in the previous year.
 
 Non-GAAP Financial Measures
 
We use the term “store contribution” in this quarterly report on Form 10-Q. Store contribution consists of income before income tax expense, interest, store and distribution center depreciation and amortization, store preopening expense and general and administrative expense, excluding franchise fees, income from licensing activities and contribution from our webstore and seasonal and event-based locations. This term, as we define it, may not be comparable to similarly titled measures used by other companies and is not a measure of performance presented in accordance with U.S. generally accepted accounting principles (GAAP).
 
We use store contribution as a measure of our stores’ operating performance.  Store contribution should be considered a supplement to, and not a substitute for, net income, net income per store, cash flows provided by operating activities, cash flows provided by operating activities per store, or other income or cash flow data prepared in accordance with GAAP.  We believe store contribution is useful to investors in evaluating our operating performance because it, along with the number of stores in operation, directly impacts our profitability.
 
 
15

 
 
The following table sets forth a reconciliation of store contribution to net income (loss) for our company-owned stores located in the United States, Canada and Puerto Rico (North America), stores located the United Kingdom, Ireland and France (Europe) and for our consolidated store base (in thousands):
 
   
Thirteen weeks ended
   
Thirteen weeks ended
 
   
April 2, 2011
   
April 3, 2010
 
   
North
               
North
             
   
America
   
Europe
   
Total
   
America
   
Europe
   
Total
 
Net income (loss)
  $ (2,097 )   $ (154 )   $ (2,251 )   $ 1,461     $ 218     $ 1,679  
Income tax expense (benefit)
    (1,345 )     (53 )     (1,398 )     1,044       95       1,139  
Interest expense (income)
    148       (45 )     103       (1 )     (31 )     (32 )
Store and distribution center depreciation, amortization and impairment (1)
4,492       541       5,033       4,435       609       5,044  
Store preopening expense
    47       -       47       11       -       11  
General and administrative expense (2)
    12,088       973       13,061       9,938       754       10,692  
Franchising and commercial contribution (3)
    (791 )     -       (791 )     (1,012 )     -       (1,012 )
Non-store activity contribution (4)
    (795 )     (204 )     (999 )     (727 )     (154 )     (881 )
Store contribution
  $ 11,747     $ 1,058     $ 12,805     $ 15,149     $ 1,491     $ 16,640  
                                                 
Total revenues
  $ 79,909     $ 16,082     $ 95,991     $ 85,651     $ 15,785     $ 101,436  
Franchising and commercial revenues from external customers
(1,832 )     -       (1,832 )     (1,650 )     -       (1,650 )
Revenues from non-store activities from external customers (4)
  (4,440 )     (556 )     (4,996 )     (2,688 )     (485 )     (3,173 )
Store location net retail sales
  $ 73,637     $ 15,526     $ 89,163     $ 81,313     $ 15,300     $ 96,613  
                                           
Store contribution as a percentage of store location net retail sales
  16.0 %     6.8 %     14.4 %     18.6 %     9.7 %     17.2 %
                                           
Total net income (loss) as a percentage of total revenues
  (2.6 )%     (1.0 )%     (2.3 )%     1.7 %     1.4 %     1.7 %
 

(1)
Store and distribution center depreciation, amortization and impairment includes depreciation and amortization of all capitalized assets in our store locations and Company-owned distribution center included in cost of merchandise sold.
(2)
General and administrative expenses consist of non-store, central office general and administrative functions such as management payroll and related benefits, travel, information systems, accounting, purchasing and legal costs as well as the depreciation and amortization of central office leasehold improvements, furniture and fixtures, computer hardware and software, including assets related to the virtual world, and intellectual property. General and administrative expenses also include a central office marketing department, primarily payroll and related benefits expense, but exclude advertising expenses, such as direct mail and television advertising, which are included in store contribution.
(3)
Franchising and licensing contribution includes franchising and licensing revenues and all expenses attributable to the international franchising and licensing and entertainment segments other than depreciation, amortization and interest expense/income. Depreciation and amortization related to franchising and licensing is included in the general and administrative expense caption. Interest expense/income related to franchising and licensing is included in the interest expense (income) caption.
(4)
Non-store activities include our webstores, pop-ups and seasonal and event-based locations as well as intercompany transfer pricing charges.

Seasonality and Quarterly Results
 
Our operating results for one period may not be indicative of results for other periods, and may fluctuate significantly because of a variety of factors, including: (1) changes in general economic conditions and consumer spending patterns; (2) increases or decreases in our comparable store sales; (3) fluctuations in the profitability of our stores; (4) changes in foreign currency exchange rates; (5) the timing and frequency of our marketing initiatives, including national media appearances and other public relations events; (6) the timing of our store openings and closings and related expenses; (7) changes in consumer preferences; (8) the effectiveness of our inventory management; (9) the actions of our competitors or mall anchors and co-tenants; (10) seasonal shopping patterns and holiday and vacation schedules; and (11) weather conditions.
 
 
16

 
 
The timing of new store openings may result in fluctuations in quarterly results as a result of the revenues and expenses associated with each new store location. We typically incur most preopening costs for a new store in the three months immediately preceding the store’s opening. We expect our growth, operating results and profitability to depend in some degree on our ability to increase our number of stores.
 
As a toy retailer, our sales are highest in our fourth quarter, followed by the first quarter.  The timing of holidays and school vacations can impact our quarterly results.  Historically, for North American stores, seasonality has not been a significant factor in our results of operations as the opening of new stores has mitigated the impact of the relative concentration of sales in the fourth quarter.  Our European-based stores have historically been more heavily weighted in the fourth quarter as compared to our North American stores.  We cannot ensure that this will continue to be the case.  In addition, for accounting purposes, the quarters of each fiscal year consist of 13 weeks, although we will have a 14-week quarter approximately once every six years.  The 2008 fiscal fourth quarter had 14 weeks.
 
Liquidity and Capital Resources
 
Our cash requirements are primarily for the opening of new stores, information systems and working capital.  Over the past several years, we have met these requirements through capital generated from cash flow provided by operations.  We have access to additional cash through our revolving line of credit that has been in place since 2000.
 
Operating Activities. Cash used in operating activities was $9.6 million for the thirteen weeks ended April 2, 2011 as compared with cash used in operating activities of $1.0 million for the thirteen weeks ended April 3, 2010, an increase of $8.6 million.  This increase of cash used in operating activities over the year ago period was primarily due to the timing of payments for inventory and advertising purchases, cash paid for sales tax, payroll and bonus as well as the impact of a net loss of $2.3 million in the thirteen weeks ended April 2, 2011 as compared to the net income of $1.7 million in the thirteen weeks ended April 3, 2010.
 
Investing Activities. Cash used in investing activities was $2.3 million for the thirteen weeks ended April 2, 2011 as compared to $3.3 million for the thirteen weeks ended April 3, 2010.  Cash used in investing activities during the thirteen weeks ended April 2, 2011 and April 3, 2010 primarily relates to upgrades and purchases of central office information technology systems and equipment.
 
Financing Activities. Cash flows used in financing activities of $2.5 million for the thirteen weeks ended April 2, 2011 as compared to $1.4 million for the thirteen weeks ended April 3, 2010 and consisted of cash spent for the repurchase of the Company’s common stock in both periods.  No borrowings were made under our line of credit in either the thirteen weeks ended April 2, 2011 or the thirteen weeks ended April 3, 2010.
 
Capital Resources. As of April 2, 2011, we had a consolidated cash balance of $45.1 million approximately 30% of which was domiciled outside of the United States.  We also have a line of credit, which we can use to finance capital expenditures and working capital needs throughout the year.  The credit agreement is with U.S. Bank, National Association and was amended effective December 31, 2010.  The bank line continues to provide availability of $40 million for the first half of the fiscal year and a seasonal overline of $50 million.  The seasonal overline is in effect from July 1 to December 31 each year.  Borrowings under the credit agreement are secured by our assets and a pledge of 65% of our ownership interest in our foreign subsidiaries.  The credit agreement expires on December 31, 2012 and contains various restrictions on indebtedness, liens, guarantees, redemptions, mergers, acquisitions or sale of assets, loans, transactions with affiliates and investments.  It also prohibits us from declaring dividends without the bank’s prior consent, unless such payment of dividends would not violate any terms of the credit agreement.  Borrowings bear interest at LIBOR plus 1.8%.  Financial covenants include maintaining a minimum tangible net worth, maintaining a minimum fixed charge coverage ratio (as defined in the credit agreement) and not exceeding a maximum funded debt to earnings before interest, depreciation and amortization ratio.  As of April 2, 2011: (i) we were in compliance with these covenants; (ii) there were no borrowings under our line of credit; (iii) there was a standby letter of credit of approximately $1.1 million outstanding under the credit agreement; and (iv) there was approximately $38.9 million available for borrowing under the line of credit.
 
 
17

 
 
Most of our retail stores are located within shopping malls and all are operated under leases classified as operating leases. Our leases in North America typically have a ten-year term and contain provisions for base rent plus percentage rent based on defined sales levels.  Many of the leases contain a provision whereby either we or the landlord may terminate the lease after a certain time, typically in the third to fourth year of the lease, if a certain minimum sales volume is not achieved.  In addition, some of these leases contain various restrictions relating to change of control of our company.  Our leases also subject us to risks relating to compliance with changing mall rules and the exercise of discretion by our landlords on various matters, including rights of termination in some cases.
 
Our leases in the U.K. and Ireland typically have terms of 10 to 15 years and generally contain a provision whereby every fifth year the rental rate can be adjusted upwards to reflect the current market rates. The leases typically provide the lessee with the first right for renewal at the end of the lease. We may also be required to make deposits and rent guarantees to secure new leases as we expand. Real estate taxes also change according to government time schedules to reflect current market rental rates for the locations we lease. Rents are charged quarterly and paid in advance.
 
In fiscal 2011, we expect to spend a total of $12 to $15 million on capital expenditures.  Capital spending through the thirteen weeks ended April 2, 2011 totaled $2.3 million, on track with our full year plans.  Capital spending in fiscal 2011 is primarily for the continued installation and upgrades of central office information technology systems, the opening of six new stores and the relocation of four stores.
 
We believe that cash generated from operations and borrowings under our credit agreement will be sufficient to fund our working capital and other cash flow requirements for the near future. Our credit agreement expires on December 31, 2012.

On February 20, 2007, we announced that our board of directors had authorized a $25 million share repurchase program of our outstanding common stock.  On March 10, 2008, we announced an expansion of our share repurchase program to $50 million.  On March 2, 2011, we announced that our share repurchase program had been extended to March 31, 2012.  We currently intend to purchase up to an aggregate of $50 million of our common stock in the open market (including through 10b5-1 plans), through privately negotiated transactions or through an accelerated repurchase transaction.  The primary source of funding for the program is expected to be cash on hand.  The timing and amount of share repurchases, if any, will depend on price, market conditions, applicable regulatory requirements, and other factors.  The program does not require us to repurchase any specific number of shares and may be modified, suspended or terminated at any time without prior notice.  Shares repurchased under the program will be subsequently retired.  As of May 9, 2011, approximately 3.4 million shares at an average price of $8.53 per share have been repurchased under this program for an aggregate amount of $28.8 million, leaving $21.2 million of availability under the program.
 
Off-Balance Sheet Arrangements
 
We hold a minority interest in Ridemakerz, which is accounted for under the equity method.  We purchased a call option from a group of other Ridemakerz investors for $150,000 for 1.25 million Ridemakerz common units at an exercise price of $1.25 per unit.  The call option was immediately exercisable and expires April 30, 2012.  Simultaneously, we granted a put option to the same group of investors for 1.25 million common units at an exercise price of $0.50 per unit.  The put option was exercisable on April 30, 2008 and expires on April 30, 2012.  As of April 3, 2010, the book value of our investment in Ridemakerz had been reduced to zero.  We still retained an ownership interest of approximately 17%.  Under the current agreements, we could own up to approximately 26% of fully diluted equity in Ridemakerz.
 
Inflation
 
We do not believe that inflation has had a material adverse impact on our business or operating results during the periods presented.  We cannot provide assurance, however, that our business will not be affected by inflation in the future.
 
Critical Accounting Estimates
 
The preparation of financial statements in conformity with U.S. GAAP requires the appropriate application of certain accounting policies, which require us to make estimates and assumptions about future events and their impact on amounts reported in our financial statements and related notes.  Since future events and their impact cannot be determined with certainty, the actual results will inevitably differ from our estimates.  Such differences could be material to the financial statements.
 
We believe application of accounting policies, and the estimates inherently required therein, are reasonable.  These accounting policies and estimates, including those related to inventory, long-lived assets, goodwill, revenue recognition and income taxes, are reevaluated on an ongoing basis, and adjustments are made when facts and circumstances dictate a change.  Historically, we have found our application of accounting policies to be appropriate, and actual results have not differed materially from those determined using necessary estimates.
 
Our critical accounting policies and estimates are discussed in and should be read in conjunction with our annual report on Form 10-K, as filed with the Securities and Exchange Commission on March 17, 2011, which includes audited consolidated financial statements for our 2010, 2009 and 2008 fiscal years. There have been no material changes to the critical accounting policies and estimates disclosed in the 2010 Form 10-K.
 
 
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Recent Accounting Pronouncements
 
There are no new accounting pronouncements for which adoption is expected to have a material effect on the Company’s financial statements in future accounting periods.
 
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
 
Our market risks relate primarily to changes in interest rates, and we bear this risk in two specific ways.  First, our revolving credit facility carries a variable interest rate that is tied to market indices and, therefore, our results of operations and our cash flows can be impacted by changes in interest rates.  Outstanding balances under our credit facility bear interest at LIBOR plus 1.8%. We had no borrowings outstanding during the fiscal 2011 first quarter.  Accordingly, a 100 basis point change in interest rates would result in no material change to our annual interest expense.  The second component of interest rate risk involves the short term investment of excess cash in short term, investment grade interest-bearing securities.  These investments are considered to be cash equivalents and are shown that way on our balance sheet.  If there are changes in interest rates, those changes would affect the investment income we earn on these investments and, therefore, impact our cash flows and results of operations.
 
We conduct operations in various countries, which expose us to changes in foreign exchange rates.  The financial results of our foreign subsidiaries and franchisees may be materially impacted by exposure to fluctuating exchange rates.  Reported sales, costs and expenses at our foreign subsidiaries, when translated into U.S. dollars for financial reporting purposes, can fluctuate due to exchange rate movement.  While exchange rate fluctuations can have a material impact on reported revenues, costs and expenses, and earnings, this impact is principally the result of the translation effect and does not materially impact our short-term cash flows.
 
Although we enter into a significant amount of purchase obligations outside of the U.S., these obligations are settled primarily in U.S. dollars and, therefore, we believe we have only minimal exposure at present to foreign currency exchange risks for our purchase obligations. Historically, we have not hedged our currency risk and do not currently anticipate doing so in the future.
 
We do not engage in financial transactions for trading or speculative purposes.
 
Item 4. Controls and Procedures.
 
Disclosure Controls and Procedures. The Company’s management, with the participation of the Company’s Chief Executive Bear and Chief Operations and Financial Bear, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)), as of the end of the period covered by this report. Our disclosure controls are designed to provide reasonable assurance of achieving their objectives and based on  the aforementioned evaluation, the Company’s management, including the Chief Executive Bear and Chief Operations and Financial Bear, have concluded that the Company’s disclosure controls and procedures were effective at the reasonable assurance level as of April 2, 2011, the end of the period covered by this quarterly report.
 
It should be noted that our management, including the Chief Executive Bear and the Chief Operations and Financial Bear, does not expect that the Company’s disclosure controls and procedures or internal controls will prevent all error and all fraud.  A control system, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.  Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.  Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.  These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake.  Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls.  The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.  Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
 
Changes in Internal Control Over Financial Reporting. The Company’s management, with the participation of the Company’s Chief Executive Bear and Chief Operations and Financial Bear, also conducted an evaluation of the Company’s internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) to determine whether any changes occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. Based on that evaluation, there has been no such change during the period covered by this report.
 
 
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PART II – OTHER INFORMATION
 
Item 1A. Risk Factors
 
There have been no changes to our Risk Factors as disclosed in our Annual Report on Form 10-K for the year ended January 1, 2011 as filed with the Securities and Exchange Commission on March 17, 2011.
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
ISSUER PURCHASES OF EQUITY SECURITIES
 
 
(a)
(b)
(c)
(d)
Period
 
Total Number of
Shares (or Units)
Purchased (1)
 
Average Price
Paid Per Share
(or Unit)
Total Number of
Shares (or Units)
Purchased as Part of
Publicly Announced
Plans or Programs (2)
Maximum Number (or
Approximate Dollar Value) of
Shares (or Units) that May Yet Be
Purchased Under the Plans
or Programs
Jan. 2, 2011 – Jan. 29, 2011
                            387
$7.57
 —  
$23,714,009
Jan. 30, 2011 – Feb. 26, 2011
                            158
$8.10
 —  
$23,714,009
Feb. 27, 2011 – Apr. 2, 2011
                     478,855
$6.51
                            374,523
$21,249,805
Total
                     479,400
$6.51
                            374,523
$21,249,805


(1)
Includes shares of our common stock delivered to us in satisfaction of the tax withholding obligation of holders of restricted shares which vested during the applicable period. Our equity incentive plans provide that the value of shares delivered to us to pay the withheld to cover tax obligations is calculated as the closing trading price of our common stock on the date the relevant transaction occurs.
(2)
On March 2, 2011, we announced the further extension of our $50 million share repurchase program of our outstanding common stock until March 31, 2012.  The program was authorized by our board of directors.  Purchases may be made in the open market or in privately negotiated transactions, with the level and timing of activity depending on market conditions, applicable regulatory requirements, and other factors.  Purchase activity may be increased, decreased or discontinued at any time without notice.  Shares purchased under the program are subsequently retired.
 
 
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Item 6. Exhibits
 
The following is a list of exhibits filed as a part of the quarterly report on Form 10-Q:
 
     
Exhibit No.
 
Description
     
2.1
 
Agreement and Plan of Merger dated April 3, 2000 between Build-A-Bear Workshop, L.L.C. and the Registrant (incorporated by reference from Exhibit 2.1 to our Registration Statement on Form S-1, filed on August 12, 2004, Registration No. 333-118142)
     
3.1
 
Third Amended and Restated Certificate of Incorporation (incorporated by reference from Exhibit 3.1 of our Current Report on Form 8-K, filed on November 11, 2004)
     
3.2
 
Amended and Restated Bylaws (incorporated by reference from Exhibit 3.4 to our Registration Statement on Form S-1, filed on August 12, 2004, Registration No. 333-118142)
     
4.1
 
Specimen Stock Certificate (incorporated by reference from Exhibit 4.1 to Amendment No. 3 to our Registration Statement on Form S-1, filed on October 1, 2004, Registration No. 333-118142)
     
10.1
 
Second Amendment to Employment, Confidentiality and Noncompete Agreement between Maxine Clark and the Company, dated as of March 22, 2011 (incorporated by reference from Exhibit 10.1 to our Current Report on Form 8-K, filed on March 28, 2011)
     
10.2
 
Form of Restricted Stock and Non-Qualified Stock Option Agreement (incorporated by reference from Exhibit 10.2 to our Current Report on Form 8-K, filed on March 28, 2011)
     
31.1
 
Rule 13a-14(a)/15d-14(a) certification (pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, executed by the Chief Executive Bear)
     
31.2
 
Rule 13a-14(a)/15d-14(a) certification (pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, executed by the Chief Operations and Financial Bear)
     
32.1
 
Section 1350 Certification (pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, executed by the Chief Executive Bear)
     
32.2
 
Section 1350 Certification (pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, executed by the Chief Operations and Financial Bear)
 
 
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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
Date: May 11, 2011
 
    BUILD-A-BEAR WORKSHOP, INC.
(Registrant)
 
         
         
 
  By: 
/s/ Maxine Clark
 
 
   
Maxine Clark
Chairman of the Board and Chief Executive Bear
 
         
    By: /s/ Tina Klocke  
      Tina Klocke
Chief Operations and Financial Bear, Treasurer
and Secretary